oig-17-120-d - audit tips for managing disaster-related ... · pdf fileemergency management...

Audit Tips for Managing Disaster-Related Project Costs

September 29 2017 OIG-17-120-D

DHS OIG HIGHLIGHTS AUDIT TIPS FOR MANAGING

DISASTER-RELATED PROJECT COSTS

September 29 2017

Why We Did This

Using this report will assist recipients and subrecipients of Federal Emergency Management Agency (FEMA) disaster assistance grants to

x document and account for disaster-related costs

x minimize the loss of FEMA disaster assistance funds

x maximize financial recovery and

x prevent fraud waste and abuse of disaster funds

The revised report is effective for all emergencies and major disasters declared on or after April 1 2017

For Further Information Contact our Office of Public Affairs at (202) 254-4100 or email us at DHS-OIGOfficePublicAffairsoigdhsgov

Key Points to Remember

x Designate a person to coordinate the accumulation of records

x Establish a separate and distinct account for recording revenue and expenditures and a separate identifier for each distinct FEMA

project

x Ensure that the final claim for each project is supported by amounts recorded in the

accounting system

x Ensure each expenditure is recorded in the accounting books and is referenced to supporting source documentation (checks invoices etc) that can be readily retrieved

x Research insurance coverage and seek reimbursement for the maximum amount Credit the appropriate FEMA project with that

amount

x Check with your Federal Grant Program Coordinator about the availability of funding under other Federal programs and ensure that the final project claim does not include costs that another Federal agency funded or should have funded

x Ensure that materials taken from existing inventories for use under FEMA projects are documented by inventory withdrawal and

usage records

x Ensure that expenditures claimed under the FEMA project are reasonable and necessary are authorized under the scope of work and directly benefit the project

x Ensure proper grant administration is established and enforced throughout the duration of the grant

wwwoigdhsgov OIG-17-120-D

OFFICE OF INSPECTOR GENERAL Department of Homeland Security

Washington DC 20528 wwwoigdhsgov September 29 2017

MEMORANDUM FOR All Recipients and Subrecipients of Disaster Grant Awards from the Federal Emergency Management Agency

FROM John E McCoy II Acting Assistant Inspector General Office of Emergency Management Oversight

SUBJECT Audit Tips for Managing Disaster-Related Project Costs Report Number OIG-17-120-D

The Department of Homeland Security (DHS) Office of Inspector General (OIG) prepared this report to provide recipients and subrecipients (grantees and subgrantees) of Federal Emergency Management Agency (FEMA) Public Assistance and Hazard Mitigation grant funds examples of previous audit findings The purpose of this report was not to audit FEMA or its grant recipients and subrecipients Therefore we did not prepare it in accordance with generally accepted government auditing standards

Rather this report provides an overview of OIG responsibilities roles of FEMA recipients and subrecipients applicable disaster assistance Federal statutes regulations and guidelines the audit process and frequent audit findings and tips for managing project costs Using this report should assist disaster assistance recipients and subrecipients to

x document and account for disaster-related costs x minimize the loss of FEMA disaster assistance funds x maximize financial recovery and x prevent fraud waste and abuse of disaster funds

We prepared this report in accordance with our leadership coordination and policy responsibilities to promote economy and efficiency and to deter waste fraud and abuse with respect to DHS programs1 This report does not constitute legal advice but is designed to be a resource It is not intended to and does not create any right or benefit substantive or procedural enforceable at law by any party or litigant

1 5 USC app sectsect 2(2) 4(a)(3)(4) wwwoigdhsgov OIG-17-120-D


Background

More than 152900 recipients and subrecipients of FEMA disaster assistance grants are currently working on about 653000 open projects worth over $68 billion Under the Public Assistance (PA) Program FEMA provides grants to state tribal and local governments and private nonprofit organizations so that communities can quickly respond to and recover from major disasters FEMArsquos Hazard Mitigation Grant Program provides funding to some of the same entities to implement long-term measures to prevent damages from future disasters

Each year OIG audit reports reveal significant issues representing millions of dollars of Federal funds allocated for disaster assistance and recovery efforts These reports also contain recommendations to protect the integrity of and improve FEMArsquos disaster assistance operations

The majority of our grant audits focus on FEMArsquos PA and Hazard Mitigation grant programs (HMGP) funded from the Disaster Relief Fund Under the PA Program FEMA provides grants to state tribal and local governments and certain types of private nonprofit organizations so that communities can quickly respond to and recover from major disasters FEMArsquos HMGP provides funding to the same entities to implement long-term measures to prevent damages from future disasters

Overview of the Office of Inspector General

The Homeland Security Act of 2002 established the OIG in DHS by amendment to the Inspector General Act of 1978 (PL 95-452) The OIG serves as an independent office to promote economy efficiency and effectiveness to prevent waste fraud and abuse and to keep Congress and the Secretary of DHS fully informed of problems in DHS programs and operations The principal functions of the OIG are to

x perform or oversee audit and investigative functions relating to programs and operations of DHS

x inspect department activities to identify actual or potential fraud waste abuse or mismanagement and to develop recommendations for corrective action and

x investigate allegations of illegal unethical or other activities that may lead to civil or criminal liability on the part of DHS or its employees contractors or program participants

Roles of FEMA Recipients and Sub-Recipients

FEMA awards PA and HMGP grants to assist state tribal and local governments and certain types of private nonprofit organizations with disaster

2wwwoigdhsgov OIG-17-120-D


relief and long-term hazard mitigation measures These programs are administered through a coordinated effort between FEMA the recipient (ie states or tribal governments) and the subrecipient (ie local or tribal governments and eligible non-profit entities)2 While all three entities must work together to meet the overall program objective each has a different role

FEMA is responsible for managing and administering the Federal award in a manner to ensure Federal funds are expended and programs are implemented in full accordance with Federal regulations and FEMA policy Both FEMA and the recipients share the responsibility for making grant funds available to the subrecipients FEMA approves the scope of work for the grants and provides technical assistance to the recipient while the recipient disburses the grant funds manages the grant monitors the day-to-day activities and provides technical assistance to the subrecipient The subrecipient must complete eligible disaster work maintain accounting records document and monitor work performed trace costs incurred and adhere to Federal regulations and FEMA guidelines

Applicable Federal Statutes Regulations and Guidelines

Federal grant recipients and subrecipients are responsible for understanding and complying with a large amount of criteria applicable to FEMA disaster grants which include those for public assistance and hazard mitigation Some help in responding to and recovering from a disaster and others help in receiving and managing Federal funds One of the most important criteria is Title 44 Code of Federal Regulations (CFR) which contains rules for implementing the Robert T Stafford Disaster Relief and Emergency Assistance Act as amended (Stafford Act) These rules govern disaster relief operations Title 44 CFR is available at the following website httpwwwgpogovfdsysbrowsecollectionCfractioncollectionCode=CFR

Another very important criterion is Title 2 CFR Part 200 Uniform Administrative Requirements Cost Principles and Audit Requirements for Federal Awards (ldquoSuper Circularrdquo or ldquoOmni Circularrdquo) The purpose of the uniform guidance was to streamline the Federal governmentrsquos guidance on administrative requirements cost principles and audit requirements to effectively focus Federal resources on improving performance and outcomes while insuring financial integrity of taxpayer dollars in partnership with non-Federal stakeholders The uniform guidance supersedes 44 CFR Part 13 and Office of Management and Budget (OMB) Circulars A-102 A-110 A-87 A-21

2 Generally the State for which the major disaster is declared is known as the recipient However an Indian Tribal government may choose to be a recipient or it may act as a subrecipient under the State (44 CFR 206431) In 2013 the Sandy Recovery Improvement Act (SRIA) allowed tribal governments acting as recipients to directly seek Stafford Act assistance from the President in the event of a disaster



A-122 and A-133 for all FEMA awards made on or after December 26 2014 Title 2 CFR Part 200 is available at the following website httpwwwecfrgovcgi-bintext-idxtpl=ecfrbrowseTitle022cfr200_main_02tpl

For all FEMA awards made before December 26 2014 the following OMB circulars apply (httpswwwwhitehousegovombinformation-for-agenciescirculars)

x OMB Circular A-102 Uniform Administrative Requirements for Grants and Cooperative Agreements to State and Local Governments [FEMA codified these requirements also referred to as the ldquoCommon Rulerdquo at 44 CFR Part 13]

x OMB Circular A-110 Uniform Administrative Requirements for Grants and Agreements with Institutions of Higher Education Hospitals and Other Non-Profit Organizations See 2 CFR Part 215 January 1 2012

x OMB Circular A-87 Cost Principles for State Local and Indian Tribal Governments See 2 CFR Part 225 January 1 2012

x OMB Circular A-21 Cost Principles for Educational Institutions See 2 CFR Part 220 January 1 2012

x OMB Circular A-122 Cost Principles for Non-Profit Organizations (excludes hospitals) See 2 CFR Part 230 January 1 2012 [According to 2 CFR 21527 the allowability of costs that hospitals incur ldquois determined in accordance with the provisions of Appendix E of 45 CFR part 74 Principles for Determining Costs Applicable to Research and Development Under Grants and Contracts with Hospitalsrdquo]

x OMB Circular A-133 Audits of States Local Governments and Non-Profit Organizations

In April 2017 FEMArsquos Public Assistance Division published the second edition of the Public Assistance Program and Policy Guide (PAPPG) which is effective for all emergencies and major disasters declared on or after April 01 20173

The PAPPG is comprehensive consolidation of program and policy documents for the PA program This guide supersedes many of the previous PA publications and individual policy documents (eg 9500 series policy statements) The PAPPG will assist recipients and subrecipients in better understanding the PA and Hazard Mitigation grant programs The PAPPG is available at the following website httpswwwfemagovpublic-assistance-policy-and-guidance

For all FEMA awards made before April 01 2017 the following FEMA policies and guidelines still apply

x FEMA 321 Public Assistance Policy Digest (January 2008)

3 The first edition of FEMArsquos PAPPG was published in January 2016 and effective for all emergencies and major disasters declared on or after January 01 2016 through April 01 2017



x FEMA 322 Public Assistance Guide (June 2007) x FEMA 323 Public Assistance Applicant Handbook (March 2010) x FEMA 325 Public Assistance Debris Management Guide (July 2007) x FEMA 327 Debris Monitoring Guide (October 2010) and x FEMA Disaster Assistance Policy (9500 series policy statements)

However the PAPPG did not supersede the following policies and guidelines

x FEMA 329 Debris Estimating Field Guide (September 2010) x Hazard Mitigation Assistance (HMA) Unified Guidance and x Public Assistance Policy on Stafford Act Section 705 (FP-205-081-2

March 31 2016)4

The policies listed above are available at the following websites httpwwwfemagovpublications-archive and httpswwwfemagovpublic-assistance-policy-and-guidance

The Sandy Recovery Improvement Act of 2013 (PL 113-2) amended Title IV of the Stafford Act Specifically the law adds section 428 which authorizes alternative procedures for the PA Program under sections 403(a)(3)(A) 406 407 and 502(a)(5) of the Stafford Act It also authorizes FEMA to implement the alternative procedures through a pilot program The program will remain in place until FEMA promulgates and adopts revised regulations that reflect the program changes the law authorizes Information is available at the following website httpswwwfemagovalternative-procedures

The alternative procedures pertain to debris removal (emergency work) and repair restoration and replacement of disaster-damaged public and private nonprofit facilities (permanent work) Participation in the alternatives procedures is voluntary

The goals of the alternative procedures are to

x reduce the costs to the Federal Government of providing public assistance

x increase flexibility in the administration of such assistance x expedite the provision of assistance to an applicant and x provide financial incentives and disincentives for timely and cost effective

completion of a project

4 This policy establishes guidelines under Section 705 (Disaster Grant Closeout Procedures) to determine whether Section 705 applies to prohibit FEMA from recovering payments made under the PA program



The Audit Process and Frequent Audit Findings

The OIG considers several factors to determine which activities to audit These factors include

x the risk of fraud waste and abuse of Federal funds x statutory and regulatory requirements x current or potential dollar magnitude x requests from congressional FEMA or state officials and x reportsallegations of impropriety or problems in implementing FEMA

programs

Traditionally the OIG conducted most of its disaster grant audits after communities completed the majority or all of the work to determine whether they had accounted for and expended FEMA funds according to Federal requirements However in 2013 the OIG implemented a more proactive approach to auditing to place greater emphasis on prevention and early detection This approach considers the entire life cycle of grant awards Currently the OIG has ongoing disaster grant audits that consist of (1) ldquocapacityrdquo audits that start usually within a year of the disaster or (2) ldquoearly warningrdquo audits that start before communities have begun work on most permanent projects These audits identify areas where grant recipients may need additional technical assistance or monitoring to ensure compliance with Federal requirements In addition by undergoing an audit early in the grant cycle grant recipients have the opportunity to correct noncompliance before they spend the majority of their grant funding It also allows them the opportunity to supplement deficient documentation or locate missing records before too much time elapses

Frequent Audit Findings (examples)

A Improper Procurement Practices

Criteria According to Federal regulations (2 CFR 200318 to 326) all non-Federal entities (other than states) must comply with the following procurement standards5

Conduct all procurement transactions in a manner providing full and open competition consistent with the standards of this section (2 CFR 200319(a)) Noncompetitive procurement may be used under certain circumstances one of which is when the public exigency or emergency will not permit a delay resulting from competitive solicitation (2 CFR 200320(f)(2))

5 States must follow the same policies and procedures they use for procurements using non-Federal funds (2 CFR 200317)


x


x Take all necessary affirmative steps to assure the use of minority businesses womenrsquos business enterprises and labor surplus area firms when possible (2 CFR 200321))

x Maintain oversight to ensure contractors perform according to the terms conditions and specifications of their contracts or purchase orders (2 CFR 200318(b))

x Maintain written standards of conduct covering conflicts of interest and governing the performance of its employees who engage in the selection award and administration of contracts (2 CFR 200318(c)(1))

x Maintain records sufficient to detail the history of the procurement These records will include but are not limited to the following rationale for the method of procurement selection of contract type contractor selection or rejection and the basis for the contract price (2 CFR 200318(i))

x Use time-and-material-type (TampM) contracts only after determining that no other contract is suitable and if the contract includes a ceiling price that the contractor exceeds at its own risk Time and material type contract means a contract whose cost to a non-Federal entity is the sum of (1) the actual cost of materials and (2) direct labor hours charged at fixed hourly rates that reflect wages general and administrative expenses and profit (2 CFR 200318(j)(1))

x Perform a cost or price analysis in connection with every procurement action in excess of the Simplified Acquisition Threshold including contract modifications (2 CFR 200323(a))

x Negotiate profit as a separate element of the price for each contract in which there is no price competition and in all cases where cost analysis is performed (2 CFR 200323(b))

x Do not use cost-plus-a-percentage-of-cost and percentage-of-construction-cost methods of contracting (2 CFR 200323(d))

x Ensure required bonds are included in construction or facility improvement contracts or subcontracts exceeding the simplified acquisition threshold (2 CFR 200325)

x Include required provisions in all contracts awarded as outlined in Appendix II in Part 200 (2 CFR 200326)

Finding 1 Competition and Disadvantaged Firms The subrecipient received a PA grant award that included $61 million for disaster-related debris removal and permanent electrical repair work The subrecipient solicited bids for the work only from contractors that it had used before the disaster As a result full and open competition did not occur and FEMA had no assurance that contract costs were reasonable or that small and minority firms womenrsquos business enterprises and labor surplus area firms had an opportunity to bid on the work As part of the audit subrecipient officials stated that they procured the contracts under exigent circumstances The OIG determined that the subrecipient had restored electrical power to almost all of its customers After such time exigent circumstances no longer existed to warrant the use of noncompetitive contracts The OIG also determined that because the



solicitation of bids came from a limited number of contractors full and open competition did not occur Therefore the OIG questioned $61 million because the subrecipient did not meet Federal procurement standards for competition

Clarification on Exigent versus Emergency Subrecipients may use procurement through a noncompetitive proposal method when the public exigency will not permit delays that could result from competitive solicitation 2 CFR 200320(f)(2)

Exigent is not necessarily the same as emergency even though often used interchangeably The general definition of exigent is a situation requiring immediate aid or action6 An emergency represents an unforeseen combination of circumstances7 A key distinction is that exigent circumstances represent those actions required to protect lives and property at the immediate outset of an emergency event

Examples Illustrating the Meaning of Exigency and Emergency

Emergency A tornado impacts the City of X and causes widespread and catastrophic damage including loss of life loss of power damage to public and private structures and millions of cubic yards of debris across the City leaving almost the entire jurisdiction inaccessible The City needs to begin debris clearance activities immediately to restore access to the community and support search and rescue operations and power restoration

Exigency A tornado impacts the City of X in June and causes widespread and catastrophic damage including damage to a City school The City wants to repair the school and have it ready for the beginning of the following school year in September The City estimates based on past experience that the sealed bidding process will take at least 90 days and the Cityrsquos engineer estimates that the repair work would take another 60 days This would bring the project completion to well after the beginning of the school year Rather than going through sealed bidding the Citymdashin compliance with State and local lawmdashwants to solicit bids from five contractors that have previously constructed schools in the State and award the contract to the lowest bidder among those five This would be an example of an ldquoexigencyrdquo for the purposes of 2 CFR 200320 (f)(2) such that sealed bidding would be infeasible under the circumstances and the use of some other procurement method was necessary based on the particular situation

Source Field Manual Public Assistance Grantee and Subgrantee Procurements Requirements FEMA Office of Chief Counsel Procurement Disaster Team p76 (December 2014)

6 Exigentrdquo - (1) requiring immediate aid or action (Merriam-Webstercom Accessed August 28 2017 httpwwwmerriam-webstercomdictionaryexigent) 7 ldquoEmergencyrdquo - (1) an unforeseen combination of circumstances (Merriam-Webstercom Accessed August 28 2017 httpwwwmerriam-webstercomdictionaryemergency)



Finding 2 Use of TampM Contracts The subrecipient used a TampM contract which was not appropriate for the construction work performed and did not include a not-to-exceed amount or cost ceiling In addition the contract included prohibited markups based on a percentage of costs By definition TampM contracts provide for acquiring supplies or services on the basis of (1) direct labor hours at specified fixed hourly rates that include wages overhead general and administrative expenses and profit and (2) materials at cost including if appropriate material handling costs The TampM rates in the contract already included profit and overhead yet the contractor charged markups of 15 to 33 percent on top of its TampM rates Additionally the subrecipient did not perform any cost or price analysis for the contract As a result the contractor had no incentive to contain project costs In fact markups as a percentage of costs provide contractors a disincentive to save costs because higher costs lead to higher profits Therefore the OIG questioned $12 million in TampM contract costs because the subrecipient did not follow Federal procurement standards

Finding 3 Competition and Cost Analysis The subrecipient did not openly compete a contract totaling $41 million for the replacementrepair of pump stations and electrical components Instead the subrecipient used a contractor with which it had a business relationship before the disaster In addition the subrecipient accepted the contractorrsquos proposed prices without performing an independent analysis of the prices to ensure reasonableness Finally the subrecipient did not take the required steps to assure the use of small businesses minority owned firms womenrsquos business enterprises and labor-surplus area firms when possible Therefore FEMA has no assurance that these types of firms had adequate opportunities to bid on federally funded work as Congress intended Therefore the OIG questioned $41 million because the procurement did not comply with Federal requirements

Finding 4 Restricting Competition The subrecipient used a shared services agreement with a regional planning commission to procure two debris removal contracts totaling $25 million that did not fully meet Federal requirements When advertising for the debris removal contracts the regional planning commission unreasonably restricted competition by not allowing smaller contractors to compete for the work For both debris removal contracts the regional planning commissionrsquos procurement practices also did not take the specific steps that Federal regulations require to provide opportunities for small and minority businesses womenrsquos business enterprises and labor surplus area firms to bid on federally funded work when possible The OIG recommended FEMA disallow as ineligible $25 million for the two contracts that the subrecipient awarded using the regional planning commissionrsquos procurement services

Federal regulations encourage grant recipients to enter into state and local intergovernmental agreements to foster greater economy and efficiency and



promote cost-effective use of shared services across the Federal Government (2 CFR 200318(e)) These state and local intergovernmental agreements are made possible through cooperative purchasing programs A cooperative purchasing program streamlines the procurement process by providing competitively priced contracts for goods and services While Federal regulations encourage shared services agreements this does not relieve the grant recipient or subrecipient of its responsibility to follow Federal procurement requirements

B Unsupported Costs

Criteria Federal cost principles (2 CFR 200403(g)) require recipients and subrecipients to adequately document costs that they claim under Federal programs OMB Circular A-122 Attachment A (A)(2)(c) require recipients and subrecipients to be consistent with policies and procedures that apply uniformly to both federally-financed and other activities of the organization

Finding 1 Inadequate Documentation The subrecipient could not provide adequate documentation to support $194000 in labor costs it claimed for seven large projects The subrecipientrsquos support for its labor costs consisted of a single line item in its costs summary labeled as ldquoSalaryrdquo The subrecipientrsquos supporting documentation did not identify the names of the employees who performed the disaster-related work when they completed the work or the number of hours they worked As a result the subrecipient could not support the accuracy of the costs it claimed for labor Therefore the OIG questioned $194000 as unsupported

Finding 2 The subrecipientrsquos claim included $300000 for labor costs However the subrecipient provided time sheets and payroll registers to support only $275000 The OIG questioned the unsupported difference of $25000

C Poor Project Accounting

Criteria Federal regulations (2 CFR 200302 and 44 CFR 206205) require recipients and subrecipients to maintain a system that accounts for FEMA funds on a project-by-project basis The system must disclose the financial results for all FEMA-funded activities accurately currently and completely It must identify funds received and disbursed and reference source documentation (ie canceled checks invoices payroll time and attendance records contracts etc)

Finding 1 Accounting for Costs on Project-by-Project Basis The subrecipient did not account for expenditures for its $15 million grant on a project-by-project basis as Federal regulations require The subrecipient could not separate disaster-related costs by project but rather set up a single account within its automated accounting system designated as the ldquoflood disasterrdquo account That single account commingled eligible disaster-related



expenditures with non-eligible expenditures Further the subrecipient did not maintain any other systems such as spreadsheets or project files that separately accumulated all project costs on a project-by-project basis Therefore the OIG questioned the entire $15 million grant because the costs were not auditable by project

Finding 2 Inadequate Accounting Entries to Support Claim The subrecipientrsquos journal of project expenditures did not contain references to payroll or daily activity reports that supported claimed payroll expenditures of $950000 charged to the FEMA project Although the subrecipient had timesheets to support the labor the OIG could not trace expenditures for labor to supporting documents nor verify the claimed costs and therefore questioned the entire $950000 claim for labor

D Duplication of Benefits

Criteria Section 312 of the Stafford Act (see also 44 CFR sect 206191) prohibits duplication of benefits In other words a subrecipient cannot receive disaster funding for activities covered by insurance benefits other Federal programs or any other source

Finding 1 Notice of Insurance Proceeds The subrecipient claimed and received $200000 to repair a fence replace dirt and construct a retaining wall at a baseball park facility However the subrecipient had insurance coverage that it had not disclosed to FEMA and received $220000 from its insurance carrier for the same damages Therefore the OIG questioned the $200000 of FEMA funding received for damages that insurance covered

Finding 2 Notice of Insurance Proceeds and Other Federal Grant Funds The subrecipientrsquos claim included $238000 of duplicate benefits The subrecipient claimed $140000 of costs that insurance also covered and $98000 to replace asphalt and perform road repairs that the US Department of Housing and Urban Development (Community Block Development Program) paid for the same road repairs The subrecipient disagreed with this finding saying that they used the insurance and US Department of Housing and Urban Development proceeds for road repairs that FEMA did not fund However the subrecipient did not provide the OIG with documentation to support their assertions Therefore the OIG questioned $238000 of ineligible duplicate benefits the subrecipient claimed

E Excessive Equipment Charges (applicability may vary with hazardmitigation projects)

Criteria Federal regulations (44 CFR 206228) require that subrecipients use the FEMA schedule of equipment rates or their local rates whichever are lower when they use their own equipment Subrecipients that do not have local



established rates must use the FEMA equipment rates when claiming costs under a FEMA project

Finding 1 Incorrect Use of Equipment Rates The subrecipient claimed $78348 for the use of bucket trucks based on the FEMA rate of $24 per hour (32645 hours x $24 per hour) However the subrecipientrsquos local equipment rate for bucket trucks was $16 per hour or $8 less than the FEMA rate Therefore the OIG questioned $26116 (32645 hours x $8) of excess charges

Finding 2 Overstated Equipment Charges The subrecipient overstated its claim for equipment by $964756 It claimed $1569593 for equipment use based on the FEMA Schedule of Equipment Rates However the subrecipient should have based its claim on actual equipment costs recorded in its accounting system which would have resulted in total equipment costs of $604837 or $964756 less than the amount claimed The subrecipientrsquos recorded equipment costs contained all the cost elements included in the FEMA equipment rates for operation of the equipment such as fuel insurance maintenance depreciation etc The OIG noted that the subrecipient used the recorded equipment costs to support equipment use in requests for construction work financing from the US Department of Agriculture Rural Utilities Service However when calculating its claim for equipment use under the FEMA projects the subrecipient used the FEMA equipment rates which resulted in the subrecipient receiving $964756 more than its actual costs of operating the equipment Therefore the OIG questioned the $964756 of excessive equipment charges

F Excessive Labor and Fringe Benefit Charges

Criteria According to Federal cost principles (2 CFR 200403(c)) allowable costs must be consistent with policies and procedures that apply uniformly to both Federal awards and other activities of the non-Federal entity Additionally according to 44 CFR 206228(a)(2)(iii) straight- or regular-time salaries and benefits of permanent employees engaged in emergency work (other eligible emergency protective measures) are not eligible for PA funding

Finding 1 Incorrect Use of Fringe Benefit Rates The subrecipient claimed $50000 for overtime fringe benefits based on a fringe benefit rate of 2355 percent However the rate included the cost of workerrsquos compensation which is not applicable to overtime The subrecipient should have based its claim on a rate of 10 percent which would have resulted in charges of $21231 Therefore the OIG questioned $28769 that the subrecipient received but to which it was not entitled

Finding 2 Overstated Labor Charges The subrecipientrsquos claim included $19000 in excess force account labor costs not based on the subrecipientrsquos written compensation policy in effect before the disaster The $19000 of



excessive costs occurred because the subrecipient paid double time for all hours worked including regular hours when an employee worked 16 consecutive hours during a work period However according to the subrecipientrsquos compensation policy and labor union contract employees who work between 8 and 16 consecutive hours during a work period receive pay at time-and-a-half rates and all hours greater than 16 would be paid at double-time rates Therefore the OIG questioned the $19000 of excessive force account labor costs that were not consistent with the subrecipientrsquos established compensation policy

G Unrelated Project Charges

Criteria According to Federal cost principles (2 CFR 200403(a)) charges to Federal grants must be necessary and reasonable for the performance of the Federal award In addition to be eligible for FEMA funds an item of work must be required because of the major disaster event (44 CFR 206223) Therefore the subrecipient must substantiate that its claimed costs directly relate to the disaster The subrecipient must also establish a clear relationship between claimed costs and the scope of work recorded on a project worksheet

Finding 1 Non-Disaster Related Costs The subrecipient claimed $267000 for materials ($254000 for transformers and $13000 for utility poles) that it used for non-disaster-related repairs However the OIG determined that the subrecipient did not use either the $254000 of costs for the transformers or the 13000 for utility poles for disaster purposes The non-disaster claim of $254000 for transformers occurred because the subrecipient based its claim on invoices for all transformers purchased after the disaster The non-disaster claim of $13000 for utility poles occurred because the subrecipient did not adjust its inventory for and inadvertently included costs for poles it used on a non-disaster work order in its claim The subrecipient later adjusted the inventory but did not credit the FEMA project Therefore the OIG questioned the $267000 of non-disaster-related costs charged to the project

H Unapplied Credits

Criteria According to Federal cost principles (2 CFR 200406) credits accruing to or received by a non-Federal entity that relate to allowable costs must be credited to the Federal award either as a cost reduction or cash refund as appropriate

Finding 1 Overstated Claim The subrecipient overstated its claim under several projects because it did not reduce project costs for $42000 of credits received on fuel and material costs and proceeds from sales of scrap Therefore the OIG questioned $42000 as unapplied credits



I Direct Administrative Costs

Criteria Federal regulations (44 CFR 2075) and FEMArsquos PAPPG identify ldquosection 324 management costsrdquo and other grant management and administrative costs that are eligible under the PA Program The Policy also clarifies the process through which recipients and subrecipients can request reimbursement for these costs Federal regulations and FEMA policy state

x Direct Administrative Costs (DAC) include costs that can be tracked charged and accounted for directly to a specific eligible project such as staff time to complete field inspection and preparation of a project worksheet (FEMA Policy 104-009-2 Chapter II section VN2 April 2017)

x Indirect Costs are costs a recipient incurs for a common or joint purpose benefiting more than one cost objective that are not readily assignable to the cost objectives specifically benefited (44 CFR 2072)

x Indirect costs may not be charged directly to a project or reimbursed separately but are considered to be eligible management costs (44 CFR 2076(b))

x Management Costs are any indirect costs administrative expenses and any other expenses that a recipient or subrecipient reasonably incurs in administering and managing the PA grant that are not directly chargeable to a specific project but are reasonably incurred in the administration of the grant award (44 CFR 2072)

x Pass-through funds are the percentage or amount of management costs that the grantee (recipient) determines it will make available to the subgrantees (subrecipients) (44 CFR 206207(b)(1)(iii)(K))

x Costs must be necessary and reasonable to be allowable under Federal awards (2 CFR 200403(a))

According to Chapter II section V N1 and N2 of the PAPPG recipients and subrecipients cannot charge costs to a project if it previously allocated similar costs for the same purposes in like circumstances to indirect costs Direct costs may be appropriate only if they meet all of the following conditions

x Administrative or clerical services are integral to a project or activity x Individuals involved are specifically identified with the project or activity x Such costs are explicitly included in the budget for the project or have

FEMArsquos prior written approval and x The costs are not recovered as indirect costs

Finding 1 Cost Allocations The subrecipient claimed $2272675 as direct administrative costs but could not track the costs separately to specific projects The subrecipient allocated its administrative travel and per diem costs over all the projects The OIG questioned the $2272675 because the subrecipient could not trace the costs directly to specific projects therefore the



costs were indirect costs incurred for a common purpose Although allocating administrative costs over all the projects may have been acceptable for project formulation (initial estimation of project cost) andor to expedite the funding process it is not acceptable for claiming direct administrative costs

Finding 2 Contractor Direct Administrative Costs The subrecipient claimed $590847 in ineligible direct administrative costs that included indirect activities (such as attending disaster briefings and completing preliminary cost estimates) and billings above contracted rates This occurred because subrecipient officials did not consistently monitor contractor performance to ensure contractors completed eligible work based on contracted rates Also the subrecipient did not follow FEMArsquos guidance on direct administrative costs allowances As a result the OIG questioned $590847 as ineligible DAC

J Obtain and Maintain Insurance

Criteria Section 311 of the Stafford Act requires applicants of disaster assistance to obtain and maintain such types and extent of insurance as may be reasonably available adequate and necessary to protect against future loss to any property to be replaced restored repaired or constructed with such assistance Federal regulations at 44 CFR 206252(d) also require grant recipients to obtain and maintain flood insurance in the amount of eligible disaster assistance as a condition of receiving Federal funds Grant recipients may also seek an exemption from insurance requirements from their State insurance commissioner

Finding 1 Flood Insurance Requirements The subrecipient did not obtain $52 million of required flood insurance coverage for its replaced disaster-damaged facilities which is a condition for receiving Federal disaster assistance As a result the subrecipient does not have adequate flood insurance coverage to meet Federal regulation insurance requirements to protect it and taxpayers in future disasters The subrecipient should have obtained and maintained $52 million in flood insurance or received an exemption from insurance requirements from its State insurance commissioner Therefore the OIG recommended that FEMA disallow as ineligible $52 million for its new buildings unless the subrecipient obtains the required insurance coverage or obtains an exemption



Key Points to Remember When Administering FEMA Grants

1 Designate a person to coordinate the accumulation of records

2 Establish a separate and distinct account for recording revenue and expenditures and a separate identifier for each distinct FEMA project

3 Ensure that the final claim for each project is supported by amounts recorded in the accounting system

4 Ensure each expenditure is recorded in the accounting books and is referenced to supporting source documentation (checks invoices etc) that can be readily retrieved

5 Research insurance coverage and seek reimbursement for the maximum amount Credit the appropriate FEMA project with that amount

6 Check with your Federal Grant Program Coordinator about the availability of funding under other Federal programs (Federal Highway Housing and Urban Development etc) and ensure that the final project claim does not include costs that another Federal agency funded or should have funded

7 Ensure that materials taken from existing inventories for use under FEMA projects are documented by inventory withdrawal and usage records

8 Ensure that expenditures claimed under the FEMA project are reasonable and necessary are authorized under the scope of work and directly benefit the project

9 Ensure proper grant administration is established and enforced throughout the duration of the grant


________________________________________________________________________


Disaster Fraud Hotline The DHS OIG not only conducts audits but also aggressively investigates allegations of fraud waste and abuse Below are a few of the more common allegations reported through our Hotline

Disaster assistance applicants use false names andor fictitious addresses

Disaster assistance applicants claim losses that they did not incur or were not entitled to claim

Private individuals claim to be FEMA employees

Disaster fund recipients are victimized by contractors who inflate repair fees andor fail to properly complete repairs

Disaster fund recipients damage their own properties to receive disaster assistance

Recipients do not use FEMA funds for the purpose intended

If you have knowledge of fraud waste or abuse or allegations of mismanagement involving disaster relief operations you can

x Call the Disaster Fraud Hotline at 1-866-720-5721

x Fax the Disaster Fraud Hotline at 1-225-334-4707

x Email disasterleogov

x Or write National Center for Disaster Fraud Baton Rouge LA 70821-4909

Calls can be made anonymously and confidentially


Additional Information and Copies

To view this and any of our other reports please visit our website at wwwoigdhsgov

For further information or questions please contact Office of Inspector General Public Affairs at DHS-OIGOfficePublicAffairsoigdhsgov Follow us on Twitter at dhsoig

OIG Hotline To report fraud waste or abuse visit our website at wwwoigdhsgov and click on the red Hotline tab If you cannot access our website call our hotline at (800) 323-8603 fax our hotline at (202) 254-4297 or write to us at

Department of Homeland Security Office of Inspector General Mail Stop 0305 Attention Hotline 245 Murray Drive SW Washington DC 20528-0305

DHS OIG HIGHLIGHTS AUDIT TIPS FOR MANAGING

DISASTER-RELATED PROJECT COSTS

September 29 2017

Why We Did This

Using this report will assist recipients and subrecipients of Federal Emergency Management Agency (FEMA) disaster assistance grants to

x document and account for disaster-related costs

x minimize the loss of FEMA disaster assistance funds

x maximize financial recovery and

x prevent fraud waste and abuse of disaster funds

The revised report is effective for all emergencies and major disasters declared on or after April 1 2017

For Further Information Contact our Office of Public Affairs at (202) 254-4100 or email us at DHS-OIGOfficePublicAffairsoigdhsgov

Key Points to Remember

x Designate a person to coordinate the accumulation of records

x Establish a separate and distinct account for recording revenue and expenditures and a separate identifier for each distinct FEMA

project

x Ensure that the final claim for each project is supported by amounts recorded in the

accounting system

x Ensure each expenditure is recorded in the accounting books and is referenced to supporting source documentation (checks invoices etc) that can be readily retrieved

x Research insurance coverage and seek reimbursement for the maximum amount Credit the appropriate FEMA project with that

amount

x Check with your Federal Grant Program Coordinator about the availability of funding under other Federal programs and ensure that the final project claim does not include costs that another Federal agency funded or should have funded

x Ensure that materials taken from existing inventories for use under FEMA projects are documented by inventory withdrawal and

usage records

x Ensure that expenditures claimed under the FEMA project are reasonable and necessary are authorized under the scope of work and directly benefit the project

x Ensure proper grant administration is established and enforced throughout the duration of the grant

wwwoigdhsgov OIG-17-120-D












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